On 'QE' day, ECB launches new anti-deflation weapon

The European Central Bank on Monday set out on its massive bond purchase programme, its most audacious scheme yet to ward off deflation and stimulate growth in the single currency area.

The reaction on the stock markets remained mostly subdued -- in face of more immediate concerns about Greece -- but the euro fell to its lowest level against the dollar in more than 11 years and bond yields also fell.

The ECB's scheme, known as quantitative easing or QE, is not new, and has already been used by the US Federal Reserve and the Bank of England to stimulate their economies.

But QE has been a long time coming on mainland Europe and is regarded as the ultimate weapon in the ECB's vast anti-deflation armoury, the culmination of a long series of unprecedented measures to bring the eurozone's flat-lining economic recovery back to life.

The ECB hopes that by buying bonds off investors they will invest the money elsewhere, thus boosting growth and ensuring a dangerous cycle of falling prices doesn't set in.

Back in January, ECB chief Mario Draghi had announced plans to buy at least 1.14 trillion euros ($1.2 trillion) in bonds, at a rate of 60 billion euros per month, at least until September 2016.

But it was only last week that Draghi actually named the exact starting date for the scheme.

"The ECB and Eurosystem national central banks have, as previously announced, started purchases under the Public Sector Purchase Programme," the ECB announced via the micro-blogging site Twitter on Monday.

Details about the size and make-up of the purchases were not immediately available, but the national central banks will do most of the buying, accounting for 92 percent of the purchases, while the ECB itself will account for 8.0 percent.

- Already having positive effect? -

From the ECB's point of view, the mere announcement of the QE programme has already been having a positive effect, bringing down borrowing costs for firms and households alike, even before any purchases were executed.

The central bank's confidence is backed up by an upward revision of its growth forecasts last week.

But analysts were more cautious, saying it was too early to gauge the effect, let alone success, of the purchases just yet.

The effect "is unlikely to become obvious on day one of the purchases. That is more likely to be a question of months," said Commerzbank analyst Ulrich Leuchtmann.

Some ECB watchers expressed scepticism as to whether the QE programme would really have the positive effect that the central bank hopes.

"(We) doubt very much that the new policy will prompt a meaningful economic recovery or counter the threat of deflation as the ECB hopes," said Capital Economics economist Jennifer McKeown.

Throughout the eurozone's long economic and financial crisis, the ECB has slashed interest rates to new all-time lows, pumped unprecedented amounts of liquidity into the banking system and repeatedly tried to revive credit and get the economy back on its feet.

But while QE may have worked in the United States and Britain, its success in the euro area, which is made up of 19 different national economies in widely differing states of health, is more difficult to predict, economists said.

- More purchases on cards? -

Commerzbank economist Joerg Kraemer said there was a "non-negligible likelihood that the ECB will be forced to expand its bond-purchase programme."

"We can well imagine that ... the ECB would increase its monthly purchase volume," Kraemer said.

Some analysts have suggested, however, that the ECB might find it difficult to find sufficient bonds to buy, as many investors will be unwilling or unable to sell top-rated government bonds, particularly those belonging to Germany.

Lueder Gerken, director of the Centre for European Policy in Freiburg, said the QE programme "will only exacerbate the eurozone's problems, because by reducing the borrowing costs on sovereign bonds, the ECB is taking off pressure on governments to reform."

At the same time, the vast amounts of liquidity being pumped into the system would increase the risk of asset bubbles forming, the expert argued.

"The answer to the eurozone's current crisis is for member states to push through reforms and boost investor confidence. Simply making more cheap money available is no solution," Gerken said.

The German finance ministry in Berlin agreed.

Governments "must focus on means to stimulate growth, labour market reforms and budget consolidation," Steffen Kampeter, in an interview with German public radio Deutschlandfunk.